A market-beating portfolio
How to build an easy large cap portfolio that outperforms the S&P 500 over the long term
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How to build an easy large cap portfolio that outperforms the S&P 500 over the long term
Unlike the Canadian equity market which is concentrated in three sectors (financials, energy, materials), most equity investors would argue the US market is far more efficient both in terms of available liquidity, and the representation of the full economy with more stocks to choose from within each sector. This being said, the S&P 500 Total Return Index is certainly a tougher benchmark to beat factoring in the added efficiencies when compared the S&P/TSX Composite TR Index. This leaves most Canadian investors who may be looking to take advantage of the recent strength in the Canadian dollar in a bit of a conundrum.
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A Low-Maintenance U.S. conservative large cap portfolio that outperforms the S&P500 TR Index over the long term. To achieve this, I use Morningstar CPMS* to design a low-maintenance portfolio (with the idea of keeping transaction costs low) that ranks stocks within the S&P 500 TR Index on two simple factors:
During this process, 20 stocks were purchased and equally weighted with two stocks per economic sector. Once a quarter, we used dividend proceeds to re-balance stocks back to their equally weighted target. Once a year, we replaced all the stocks in the portfolio with the highest ranked stocks based on the above two parameters. When I used Morningstar CPMS to back test this strategy from December 1993 to June, 2017 I found this strategy produced an annualized total return of 13.4% while the S&P 500 TR Index returned 9.4%.
The stocks that qualify for purchase into the strategy are listed in the table below. As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here:
Rank | Company | Morningstar Sector | Market Cap ($USD Millions) | Yield (%) | 5Y Historic Beta |
---|---|---|---|---|---|
1 | Southern Company (SO) | Utilities | $46,994.8 | 4.9 | 0.1 |
2 | FirstEnergy Corp (FE) | Utilities | $13,866.9 | 4.6 | 0.2 |
3 | AT&T Inc. (T) | Communication Services | $222,742.0 | 5.4 | 0.5 |
4 | Verizon Communications (VZ) | Communication Services | $178,309.2 | 5.3 | 0.5 |
5 | L Brands, Inc. (LB) | Consumer Cyclical | $12,695.7 | 5.4 | 0.6 |
6 | Occidental Petroleum (OXY) | Energy | $45,423.8 | 5.2 | 0.7 |
7 | Macy's Inc. (M) | Consumer Cyclical | $6,909.3 | 6.7 | 0.8 |
8 | Target Corporation (TGT) | Consumer Defensive | $29,819.8 | 4.6 | 0.6 |
9 | Conagra Brands, Inc. (CAG) | Consumer Defensive | $14,097.6 | 2.5 | 0.2 |
10 | ONEOK Inc (OKE) | Energy | $11,574.7 | 5.4 | 1.2 |
11 | Eli Lilly & Co (LLY) | Healthcare | $93,501.2 | 2.5 | 0.3 |
12 | People's Untd Fncl Inc. (PBCT) | Financial Services | $6,081.2 | 3.9 | 0.8 |
13 | CH Robinson Worldwide (CHRW) | Industrials | $9,245.1 | 2.7 | 0.5 |
14 | Motorola Solutions, Inc (MSI) | Technology | $14,821.7 | 2.1 | 0.3 |
15 | Int'l Business Machines (IBM) | Technology | $137,157.2 | 4.1 | 1 |
16 | Lyondellbasell Ind NV (LYB) | Basic Materials | $35,142.2 | 4.1 | 1 |
17 | Pfizer Inc (PFE) | Healthcare | $198,848.6 | 3.8 | 1 |
18 | Grainger WW Inc (GWW) | Industrials | $9,746.7 | 3.1 | 0.7 |
19 | CF Industries Hldg Inc. (CF) | Basic Materials | $7,046.8 | 4 | 1.2 |
20 | Western Union Company (WU) | Financial Services | $9,029.2 | 3.7 | 1.2 |
Data as of July 24th, 2017
* Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email